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The Effect of ESOP Adoptions on Corporate Performance: Are there Really Performance Changes? 

by: Pugh, William N.; Oswald, Sharon L.; Jahera, John S., Jr.
Source: Managerial and Decision Economics  

Employee Stock Ownership Programs (ESOPS) have long been promoted as a motivational tool: employees become profit-minded owners. Latterly, however, more ESOPs are being used as part of a takeover defense: here, the ESOPs main purpose is to put more company stock in friendly hands - the employees - who, like existing management, could suffer layoffs, ect. in a hostile takeover. It is found, as a group, only the takeover-related ESOPs are associated with increased leverage. Non-target firms show no long-term increase in debt-to-assets. Little evidence is found to support the motivation hypothesis: while actual labor costs are lower for ESOP firms, after industry-adjusting they tend to be unaffected or higher. It is found that a few measures of firm financial performance do improve significantly, but this appears to be largely a short-term effect. Industry-adjusted holding period returns appear to be unaffected by the ESOP; however, ESOP firms that leverage show evidence of long-term market underperformance. It is concluded that ESOPs provide, at best, only a short-term boost to corporate performance.